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HelloFresh's Growth Shows Blue Apron's Problems Are Self-Imposed

Blue Apron is losing market share to its German rival faster than ever.

The meal kit industry is a tale of two brands these days. On one side is Blue Apron Holdings, Inc. (NYSE:APRN), a busted IPO that has lost nearly 80% of its share value since its market debut last June. On the other is HelloFresh, the German company that is quickly taking market share from Blue Apron and has seen its stock move steadily higher since its IPO on the Frankfurt Stock Exchange in November.

While Blue Apron is losing customers and sales, HelloFresh just posted a blowout earnings report with revenue jumping 69% in its fourth quarter on a constant-currency basis. In the U.S., its growth has been even stronger as the company has clearly benefited from Blue Apron's collapse. Hello Fresh's revenue grew 106.5% in the U.S in the fourth quarter compared to the year-ago period on a constant-currency basis, capping a year in which sales were up 94.4% in the U.S. and active customers more than doubled.

However, putting the growth disparity aside, the numbers show that the business models and operating metrics of the two companies are more similar than you'd think.

Image source: Blue Apron.

Apples to apples

In the recent report, HelloFresh said the company was fast approaching breakeven adjusted EBITDA, saying it expects to reach breakeven by the fourth quarter of 2018. In its most recent report, however, HelloFresh expenses mirror Blue Apron's or even show a less efficient business. HelloFresh, for instance, posted a contribution margin, or the percentage of revenue after costs to fulfill orders are subtracted, of 26.9% in the U.S. in the fourth quarter and 23% for the year. By contrast, Blue Apron had a contribution margin of 29.9% in its most recent quarter and 28.8% for the year.

HelloFresh also spent more of its revenue on marketing than Blue Apron, with 26.5% of revenue going to marketing last year, compared to 17.5% for Blue Apron. Even before Blue Apron scaled back its marketing spending due to operational problems, its marketing expenses took up 18.1% of total revenue in 2016. Of course, HelloFresh's increased marketing spending may explain the company's fast growth at a time when Blue Apron is giving up sales, but HelloFresh's business model does not appear to be significantly more efficient than Blue Apron's.

What it means for Blue Apron

HelloFresh's success shows that there is still plenty of opportunity for growth in the meal kit industry. The company anticipates revenue growth of 25% to 30% overall next year and expects it to be even faster in the U.S. HelloFresh recently announced the acquisition of Green Chef, a USDA-certified meal-kit provider, and said the deal will allow HelloFresh to offer the largest selection of meal plans for consumers.

I've argued before that Blue Apron would be smart to make an acquisition of its own, or seek a buyer, as consolidation is inevitable in the meal-kit industry, and smaller start-ups will need to eventually find a partner to survive.

Whether Blue Apron can reverse its recent downward trajectory and capture the growth available in meal kits is an open question, but CEO Brad Dickerson has promised to work toward profitability, which should improve now that the company has moved past operational problems at its Linden, NJ, facility. The company still projected revenue to decline this year as Dickerson said it will take Blue Apron time to rebuild momentum in marketing and customer acquisition following the pullback in the second half of last year. That guidance may explain the company's recent decision to sell its meal kits in stores, which could help make up for that decline in revenue.

Still, Blue Apron's forecast indicates that Hello Fresh will be able to grab significantly more market share this year, further pressuring Blue Apron's long-term growth prospects and opportunities for a comeback.

As the meal-kit space attracts entrants like Walmart and Weight Watchers, it's clear that there are going to be winners and losers in the space. With HelloFresh's ascendance, Blue Apron looks like it will remain on the losing side of the ledger.

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